“Our track record has encouraged us to actively pursue a broad range of opportunistic real estate debt opportunities across the U.S.,” said Scott Wilson, the firm’s managing director for business development.

Highland Capital won’t comment on the performance of specific projects, Wilson said. He added, though, that real estate investments make up about 10 percent of the company’s $22 billion in assets, and the bankruptcies are less than 1 percent of those $2.2 billion.

Historically, Highland Capital has made money managing high-yield debt and buying distressed loans at a discount and converting those secured loans to equity if the struggling borrower defaults. More recently, Highland has taken the role as an equity investor in high-profile residential real estate projects in Texas and nationwide. It provided equity to the Canyon Falls project in Flower Mound, which filed for bankruptcy reorganization in July. It also invested in a 2,000-acre project near Denton’s Loop 288, a 1,300-acre project near San Antonio, a 600-acre project near Prosper and a 50-acre project in the Austin area. Real estate partnerships involved in each of those projects have filed for bankruptcy protection since December. In April, a judge dismissed the bankruptcy filing in the Austin project at the request of the partnership.

Highland expects to retain significant value in most of those projects after the restructurings.

“In many instances, Highland is a secured lender which will retain a priority interest over equity holders. Over the past several years, Highland has obtained significant experience utilizing the bankruptcy courts to successfully recapitalize and restructure real estate transactions,” Wilson said.

Las Vegas win

Highland Capital’s involvement in a large distressed real estate development in Nevada shows one method for investors to retain value in projects post-bankruptcy. Highland Capital and Credit Suisse Group Inc. owned loans to the developers of Lake Las Vegas, a 3,600-acre luxury residential development in Henderson, Nev., before the developers filed for Chapter 11 bankruptcy protection. At the time of the bankruptcy, Lake Las Vegas owners listed more than $500 million in liabilities and between $100 million and $500 million in assets.

In June, Highland Capital and Credit Suisse won bankruptcy court approval of a reorganization plan that makes them owners of Lake Las Vegas.

Also in June, Highland handed back land in Prosper to the owner it bought the land from in 2007 for a large mixed-used development it had invested in with Dallas-area developer Mooreland Development. The 188 acres returned to the partnership have a 2010 appraised value of $28.8 million, according to the Collin County Appraisal District.

“It gets to the point it didn’t make sense for them to own it anymore,” said John St. Clair, a land broker and representative of the family partnership that again controls the tracts of land on the northwest and northeast corners of U.S. 380 at the Dallas North Tollway.

St. Clair said the selling partnership provided financing to Highland and Mooreland’s group, so the same partnership was in position to foreclose when the Highland/Mooreland group ceased paying.

“We were very fortunate to sell it in 2007, and we were fortunate to get it back,” said St. Clair, who is a senior vice president with Henry S. Miller Brokerage LLC’s land, farm and ranch division.

Those pieces of land are near a 642-acre Prosper land partnership between Highland Capital and Addison developer Tomlin Investments, which filed for Chapter 11 bankruptcy protection on July 2. Tomlin declined to comment.

Chasing alpha

James Dondero and Mark Okada founded Highland Capital Management in 1995. The pair previously worked together as investment managers in Los Angeles for Birmingham, Ala.-based Protective Life Insurance Corp.

Highland grew in the late 1990s by investing in distressed debt and other securities. Highland grew to about $40 billion in assets under management in 2007, according to news reports, but has shrunk to $22 billion in 2010.

The move from investing in complex securities and derivatives to owning dirt is a natural evolution for some hedge funds, said Charles Gradante, principal in New York hedge fund research and advisory group Hennessee Group LLC.

Hedge funds such as Highland that invest in distressed assets have performed comparatively well through the downturn, and that has more investment managers looking at that as an option.

Hennessee’s index of distressed-investing hedge funds shows a 6.5 percent return through July. Its index of all hedge funds are returning 1.86 percent in the same time.

Keeping returns at that level is a challenge, Gradante said.

Banks and other lenders are still holding a lot of debt that ought to be sold at a discount, Gradante said. The competition among investors and reluctance of lenders to sell off distressed loans has diminished and delayed returns — “alpha” in finance lingo — in the distressed debt arena, he said.

“The alpha now is not in equity and not in bonds, the alpha is in owning liquid distressed stuff,” Gradante said. “The multistrategy and distressed hedge funds are evolving a lot like investment banks.”

Wall Street’s investment banks started out making loans that conventional banks wouldn’t make, and evolved into taking ownership positions to chase larger returns.

“Hedge funds are moving in that direction for the same reasons,” he said.